What does Kongsberg Automotive ASA’s (OB:KOA) Balance Sheet Tell Us About Its Future?
Investors are always looking for growth in small-cap stocks like Kongsberg Automotive ASA (OB:KOA), with a market cap of øre3.4b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into KOA here.
Does KOA produce enough cash relative to debt?
KOA has built up its total debt levels in the last twelve months, from €245m to €269m , which accounts for long term debt. With this growth in debt, KOA’s cash and short-term investments stands at €52m , ready to deploy into the business. On top of this, KOA has produced €22m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 8.3%, indicating that KOA’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KOA’s case, it is able to generate 0.083x cash from its debt capital.
Does KOA’s liquid assets cover its short-term commitments?
With current liabilities at €236m, it appears that the company has been able to meet these obligations given the level of current assets of €420m, with a current ratio of 1.78x. Generally, for Auto Components companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is KOA’s debt level acceptable?
Since total debt levels have outpaced equities, KOA is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In KOA’s case, the ratio of 3.78x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as KOA’s high interest coverage is seen as responsible and safe practice.
Next Steps:
KOA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around KOA’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure KOA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Kongsberg Automotive to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for KOA’s future growth? Take a look at our free research report of analyst consensus for KOA’s outlook.
Valuation: What is KOA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KOA is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
